FILE PHOTO: U.S. flag and judge's gavel are seen in this illustration created on August 6, 2024. REUTERS/Dado Ruvic/Illustration/File Photo

By Jonathan Stempel

NEW YORK (Reuters) -A federal appeals court revived a lawsuit on Monday accusing Hain Celestial Group of defrauding shareholders by concealing an alleged "channel stuffing" scheme to inflate revenue and its stock price.

Reversing a trial judge's dismissal, the 2nd U.S. Circuit Court of Appeals in Manhattan said shareholders plausibly alleged that the organic and natural foods company and four executives intended to deceive them about its financial results and compliance with accounting principles.

Hain products include Terra and Garden of Eatin' chips, Earth's Best baby food and Celestial Seasonings tea.

The Hoboken, New Jersey-based company and its lawyers did not immediately respond to requests for comment. Lawyers for the shareholders did not immediately respond to similar requests.

Channel stuffing is a practice where a company arranges for more goods to be shipped to distributors than consumers will likely buy.

This boosts present sales, but cannibalizes revenue from future quarters. Some companies use channel stuffing to avoid missing Wall Street financial forecasts.

Shareholders accused Hain of inflating fiscal 2014 to 2016 results by concealing its growing reliance on cash, discounts, easy product returns and other side deals to induce distributors such as United Natural Foods and Walmart to accept more inventory, and make its own revenue "look pretty."

Hain restated some results in 2017, and settled a related U.S. Securities and Exchange Commission civil probe in 2018. The SEC found books and records violations but did not fine Hain.

COURT SAYS CHANNEL STUFFING WAS A PRIORITY AT HAIN

Circuit Judge Robert Sack found sufficient allegations that Hain publicly used misleading "half-truths" that factors such as "strong worldwide demand" aided results, while concealing how executives told employees to keep quiet about channel stuffing.

"Pushing product at the end of quarters through various channel-stuffing tactics was a top-down priority," Sack wrote in a 65-page opinion.

"Put simply," he added, "it would strain credulity to conclude that the individual defendants were unaware of channel stuffing and its potentially insidious implications for investors."

Hain argued it had no intent to defraud, and the SEC decision to impose no fine and charge no one with securities fraud supported a dismissal.

The appeals court returned the nine-year-old case to U.S. District Judge Joanna Seybert in Central Islip, New York, who dismissed it in September 2023.

The case is Gimpel et al v Hain Celestial Group Inc et al, 2nd U.S. Circuit Court of Appeals, No. 23-07612.

(Reporting by Jonathan Stempel in New York; Editing by Lisa Shumaker)